Drop in Home Prices Picked Up Speed in January

By MICHAEL CORKERY and KELLY EVANS Home-price declines in many of the largest U.S. cities accelerated in January, according to a closely watched index, offering a grim reminder that the housing market remains in a deep contraction despite recent glimmers of stability. The S&P Case Shiller Index, which tracks prices in 20 metropolitan areas, fell 19% for the three-month period ended in January, compared with the year-earlier period. The decline, which follows a 18.5% decline for the three-month period ended in December, was a record annual rate of decline. MORE Sortable Chart: Home Prices, by Metro AreaReal Time Econ: Every State ContractsDevelopments: Pay Mortgage or Walk Away?The biggest declines were in cities already hardest hit in the housing bust, including Phoenix, where prices were down 35%, and San Francisco, where prices were off 32%. Nationally, home prices have fallen to levels similar to those of 2003. The price declines, while alarming to home sellers, may explain why the housing market is starting to attract additional buyers. Last week, the National Association of Realtors said sales of existing homes rose an unexpected 5.1% in February from the previous month, providing a ray of hope that sales may be bottoming. Nearly half of those sales were foreclosed houses and other "distressed" properties that were snapped up by buyers looking for bargains. A few builders are reporting that sales of new homes are also improving slightly, but only as these companies sharply cut prices to compete with foreclosures. The median sales price for a new home was $200,900 in February, down from $251,000 a year earlier. While rising sales indicate demand is slowly returning, the bargain hunting is likely to drive prices lower in the next several months. When will home prices stop sliding? "When the share of home sales that are distressed starts to decline is the day that house prices will hit bottom," says Mark Zandi, chief economist at Moody's Economy.com. That day could be a ways off. Home lenders, many of which had halted foreclosures temporarily in anticipation of the government's housing plan, appear to be increasing efforts to foreclose. That could produce a new supply of distressed properties. In February, the number of new foreclosure starts rose to 243,000 from 217,000 in January, according to Hope Now, a coalition of mortgage companies, investors and housing counselors, on Monday. By the end of the year, however, Mr. Zandi expects the number of foreclosed houses to decline, as the Obama administration's mortgage-modification plan kicks into gear. The upshot for home buyers is that for the next several months, homes are likely to remain more affordable than they have been in the past several decades, and mortgage rates are near historic lows. First-time home buyers are also being helped by an $8,000 federal tax credit, and several states have passed or are considering similar subsidies. California is offering a $10,000 tax credit to buyers of new homes, which is helping goose sales, home builders say. Matt Daigle, 32 years old, a public-relations executive who works in Alexandria, Va., and his wife, who works in the airline industry, are among those first-time buyers lured into the market by lower prices. They weren't alone -- the Daigles were surprised when they got outbid on several bank-owned properties. "Things were starting to get swooped up," Mr. Daigle said. "It was like a switch had been flipped." The Daigles just had their offer of $275,000 accepted on a single-family house in Leesburg, Va., where the market has shown signs of stabilizing amid a relatively good employment outlook in Washington. Nationally, however, the employment picture looks pretty grim, which could add to the foreclosure supply as people lose their jobs and default on their mortgages, adding to the pressure on home prices. But the housing market could improve before the job market, said housing economist Thomas Lawler. In the early 1980s, new home sales ticked up before unemployment peaked, Mr. Lawler said. "If there is a perception on the part of home buyers that the economy might start to rebound in the foreseeable future, then home sales could rebound before the economy does," said Mr. Lawler, who had been a longtime housing bear. "I believe there is cause for cautious optimism." Write to Michael Corkery at michael.corkery@wsj.com and Kelly Evans at kelly.evans@wsj.com